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SEBI Introduced New Rules For Stock-Brokers To Prevent Market Frauds

Stock Brokers also need to establish appropriate escalation and reporting procedures.

The Securities and Exchange Board of India (SEBI) has introduced a new institutional mechanism that requires stock brokers to establish systems to identify and prevent market abuse, such as deceptive trading, price manipulation, front running, pump and dump schemes, insider trading, mis-selling, unauthorised trading, and the use of ‘mule accounts’.

Brokerage firms and their senior management will now be responsible for detecting and preventing fraud and market abuse by implementing strong surveillance and control systems. Stock Brokers also need to establish appropriate escalation and reporting procedures.

Previously, no specific regulatory provisions held brokers accountable for establishing systems to prevent market abuse.

The market regulator amended the stock brokers and PFUTP  (Prohibition of Fraudulent and Unfair Trade Practices) rules enacted on June 27 to reflect these changes.

SEBI commented, “Any deviations from internal controls, risk management policy, surveillance policy, policies for client onboarding, and the proposed corrective actions for such deviations shall be presented to the appropriate Committee, Board of Directors, or equivalent bodies of the stock broker at regular intervals. These deviations will also be included in the report to be submitted by the stock broker to the stock exchanges.”

Furthermore, stockbrokers must implement a whistleblower policy that provides a confidential channel for employees and other stakeholders to report concerns about suspected fraudulent, unfair, or unethical practices, with adequate protection for whistleblowers.

The market regulator has strengthened rules to prevent trading through mule accounts. SEBI added, “Transactions through mule accounts for engaging in manipulative, fraudulent, and unfair trade practices will always be considered to be included in PFUTP (Prohibition of Fraudulent and Unfair Trade Practices) norms.”

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